What can we expect from the Conservative Party Conference this week?

Last week’s Labour party conference couldn’t have gone much better for Jeremy Corbyn. After two fractious years of infighting and chaos, the party presented itself as more united. Tom Watson and Sadiq Khan, two of Corbyn’s biggest critics in the past, both publicly backed their leader in their speeches, while Corbyn himself stood tall and delivered the sort of confident and inspiring speech that he has struggled with in the past.

As we look ahead at this week, the pressure is firmly on Theresa May and her Conservative Party to do the same and win back the support that has evaded her since she called a snap election earlier this year. Her main challenge comes from within her own party and the uncertainty surrounding the future leadership of the Tory party. There has been widespread speculation that Mrs. May will not see through her full term in office and instead step down before the next election – possibly after Brexit negotiations have been concluded. Meanwhile, Boris Johnson has stepped up his leadership campaign, following up his article in the Telegraph last month with a similar article in The Sun newspaper making it very clear how he would conduct Brexit negotiations. Johnson is now favorite to succeed Mrs. May as the next leader of the Tory party.

A second challenge is how to appeal to younger voters. Unsurprisingly, Corbyn gained a significant support for his pledge to scrap university tuition fees. May’s promise to cap fee increases simply doesn’t compare. Her plan to raise the threshold at which students start to pay back loans should help, but the promise to review the whole student finance system is likely to end up in the long grass alongside a number of other pledges which deep down, we all know can’t be funded without significant tax rises.

In terms of key events, Boris Johnson is scheduled to speak tomorrow between 2.50pm and 4pm. The media is expecting him to remain loyal to the party’s policies so there is scope for surprise if he ventures off course. The Prime Minister is scheduled to follow up tomorrow at 2pm with her speech titled “Building a country that works for everyone.”

We assess three possible outcomes:

More of the same – the high probability is that there will be little in the way of radical reform regarding both Brexit and UK fiscal policy (other than what has already been spoken about in advance of May’s speech on Wednesday). This may lead to a sense of disappointment, certainly from the press, but we’d expect little impact on sterling. To this, we assign a probability of circa 85%.

Theresa May unites her party and the voters – With Corbyn now hot on Theresa May’s heals and showing a clear intent on taking control of the country, it is prime time for the Tories to take control with clear and decisive plans for both Brexit and UK politics. Expectation for additional fiscal stimulus, together with greater clarity over Brexit would almost certainly have a positive impact on sterling and could pave the way for a swift rally towards $1.40. To this, we assign a probability of around 10%.

Theresa May steps down as Tory leader – The uncertainty created by May resigning as party leader, even if a replacement was quickly appointed, would certainly place downward pressure on the pound (in the near term at least) and target $1.20 in the weeks ahead. The prospect of another election and a labour victory would increase substantially. While we see this outcome as an extremely low probability event (sub 5%) it certainly shouldn’t be ruled out.

Looking elsewhere for inspiration this week, the data calendar is relatively light. This morning’s UK manufacturing PMI survey was marginally weaker than expected (55.9 vs expectations of 56.2) but still suggests strong growth in the sector. The market is now pricing in an 82% chance of a 0.25% rate hike when the MPC next meets in November. A strong figure from the service sector on Wednesday (consensus 53.2) will further cement expectations. However, all eyes will remain firmly on Manchester for the week ahead.

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